RULES FOR SINGLE CYLINDER SYSTEM SEPT 12 ,2002 REV. 02 1) We have come to the conclusion, that for the system to produce 100% per annum, we need a “toolbox” Of 6 different stocks. This is just a fact of life we must accept. Now the job is to reduce the time and Drudgery to maintain this “toolbox”. This is done by a highly streamlined system of a spreadsheet , 3 charts, and a daily schedule. Our goal at this point is to accomplish our whole daily preparation and feedback in 2 hours per day. Allow another 45 minutes or so for placing orders at market time. 2) VERY IMPORTANT: LIMIT LOSSES If we are long (our signals told us that today the odds are in our favor to be long) If when the day closes we are losing then.. 1. The next day check our signal (directional signal) … if it says long again move sell liimit to the sell limit of today. If it does not sell today go back to step 1. ….if it says short today (we have found ourselves crosswise to a trend!) time to bail out gracefully CALCULATE: [(limit buy today + limit sell today)/2 - .10 pts (we sell cheap, to get out..) This is our new sell limit for today. If we still don’t sell today go back to step 1 Plan is similar for short original position. 2) RISK/REWARD: Our average for our system expectancy is .30 . Therefore we never play unless: This indiviual trade has an expectancy of at least .30. Anything else just pulls us down. [THIS MEANS IF YOU ARE TRYING FOR .40 PTS, THE STOP MUST NOT BE RESTING MORE THAN 1.33 PTS AWAY FROM YOUR ENTRY LIMIT] If this is so, this particular stock from our toolbox is no good for us today, we put it back. 3) We pay ourselves 3% of our monthly winnings. (we don’t play this .. it goes in our savings account) 7% goes back into our trading account for trading our system. 4) We always take 30% of the channel as our profit target.(how much we hope to make each trade). WE ALWAYS TAKE THIS 30% WHEN IT PRESENTS ITSELF, WE DO NOT GET GREEDY! If we see an actual execution at a favorable price, we take profits when we reach .40 profits (or 30%) of channel. 5)THE POWER OF COMPOUNDING IS VERY IMPORTANT! If we calculate our equity daily and use this for our 2% risk calculation by the years end we will make 3% additional profits. Enough to pay our expenses! PLAN TO DO SIX STOCKS A. CHARTS B. DAILY INDICATORS C. STOCKS (TOOLBOX) D. DAILY ROUTINE E. ORDERS SPREADSHEET F. RESULTS/FEEDBACK A. MAKE E-SIGNAL LAYOUT THAT CONTAINS EVERYTHING WE NEED ON JUST A FEW CHARTS. 1. DAILY CHART – CHANNEL FOR VISUAL INSPECTION 2. DAILY INDICATORS CHART CONTAINS 13EMA,MACD-H, MACD LINE, 5 DAY STOCH 3. WEEKLY 22 WEEK EMA, MACD-H 4. PORTFOLIO VIEW OF OUR TOOLBOX CHARTS SHOWING HIGHS AND LOWS B. SPREADSHEET 1. WE LOOK AT THIS FOR OUR ORDERS FOR TODAY. C. STOCKS TOOLBOX THEY MUST HAVE THE FOLLOWING: 1) HUGE LIQUIDITY, HUGE VOL. 2) 30% OF THE 2 DAY EMA CHANNEL > .4 3) PRICE > $20 4) STOPS (GUESS AT THIS) MUST NOT BE MORE THAN 1.3 PTS AWAY FROM CHANNEL BOUNDARIES. 5) “WELL BEHAVED” MUST MOVE “SMOOTHLY”, CHANNEL MUST HAVE GENTLE CURVES. 6) PREFER 3 UPTRENDING, 3 DOWNTRENDING STOCKS (AS DEFINED BY SLOPE OF WEEKLY 22EMA) 7) MUST ALL BE IN DIFFERENT SECTORS 8) ETF S, SPYDRS, HOLDRS, ARE ALL OK IF THEY MEET OUR OTHER REQUIREMENTS. D. DAILY ROUTINE 1) ENTER DATA HI & LO INTO SPREADSHEET (LOOK ON PORTFOLIO VIEW…(5 minutes to do this) 2) LOOK UP TODAYS LIMIT & STOPS FOR ALL STOCKS 3) FIND TODAYS DIRECTIONAL SIGNAL FOR EACH STOCK (LONG SHORT) 4) PUT EVERYTHING IN TODAY ORDER BOOK SPREADSHEET. 5) ENTER ALL AT MARKET TIME MARKET RULES: WHEN WE HAVE A SHORT SIGNAL: A)MARKET OPENS “REGULAR” NOT MORE THAN .5 PTS ABOVE OR BELOW YEST CLOSE. ENTER LIMIT ORDER B)MARKET OPEN AT OR LITTLE ABOVE, SELL ON LIMIT. IMMEDIATELY PUT IN COVER ORDER .4 PTS BELOW. KEEP STOP SAME C) AFTER 10 MINS, WAY ABOVE, BUT NOT .5 NEAR STOP SELL HERE. PUT IN IMMED COVER ORDER .4 PTS BELOW. REGULAR STOP D) OPEN BELOW COVER LIMIT, WAIT UNTIL ABOVE COVER THEN PUT IN PRECALCULATED LIMIT SELL. (OR DON’T DO ANYTHING) E) GAPS ABOVE PROPOSED STOP . DON’T DO IT! GAPS BELOW. DON’T DO IT!!!!